NM has no income tax on retirees who leave state
Q: I will be receiving retirement payments from the New Mexico ERB beginning in 2018. I am planning to move to Texas later this year. Texas has no income tax, but I assume I must pay tax in New Mexico for the ERB payments since the benefits were earned in New Mexico. Is this true, and do I need to file in New Mexico just for the ERB income?
A: You will not owe New Mexico income tax on any Educational Retirement Board payments received after you are no longer a New Mexico resident. If you move in 2017 you will not be a resident in 2018.
New Mexico has never tried to collect state income tax on retirement payments received by an out-of-state resident. Other states once did, but Congress changed the law effective for periods after 1995 to prevent states from taxing retirement pay of nonresidents.
Q: I have set up UTMA accounts for my grandchildren. The accounts are held at a brokerage house and I have named my own children the custodian of each of their children’s accounts. My question is who pays tax on the income earned by these accounts?
The grandchildren should be taxed on the income from their own UTMA. Although they have no immediate use of the funds, including the ability to request the funds, right now, the tax law still treats them as the owner of the account.
There is a possible exception to this conclusion if the income is significant enough. The so-called “kiddie tax” subjects the child’s parents to income tax if the child’s unearned income exceeds $2,100 for the year.
The kiddie tax can apply if the child is under the age of 24. It basically allows the first $1,050 of unearned income to escape tax and the next $1,050 of unearned income to be taxed at the child’s rate. So it is generally only when the child’s unearned income exceeds $2,100 that the parent will be taxed on the child’s income.
You did not mention how much income would be expected each year from the account, so I cannot say whether the parents will be taxed on any UTMA earnings. But most UTMA accounts do not earn more than $2,100 of income.
Q: While walking my dog, she was attacked by another dog and required over $4,200 of veterinary care. I threatened to sue the owner of the other dog and eventually agreed to accept $3,000 to settle the whole issue. Could the IRS argue that I have income? There was no gift intended, so I can’t say that makes it not taxable. But does the tax law allow me to offset the payment by the vet costs?
Well, I don’t know of any exception that applies to the payment of vet bills. In fact, I’m sure there is none. But the better way to view it is whether this payment could be viewed as income under general tax principles.
There is a section of the tax law that says that income includes income from “whatever source derived,” and then lists a variety of items that are income but also makes clear that the list is not exhaustive.
So my start to this answer is not encouraging. But I believe that general tax principles would not lead to the answer that you have any income. When the tax law uses the rather odd language “income includes income from whatever source,” it is necessary to define what “income” is.
Court cases that pre-date the statutory definition of income make clear that income involves an accretion to wealth. So, for example, an employer’s payment of health insurance is generally income because it increases the employee’s economic position.
The tax law then has an exclusion provision that allows that same employee to avoid income if the health plan meets the requirements set forth by the exclusion.
A reimbursement of vet bills paid does not increase your economic position. If the other dog’s owner had paid the vet the funds would not even run through your hands. The fact that the funds ran through you should not change the result.
So I think no income results from the $3,000 paid to cover the vet bills. Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.